What’s new for 2012—a roundup of tax changes effective this year

Business and retirement plan changes taking effect in 2012 and late 2011. Business changes effective in 2012 (or went into effect in December of 2011 and are thus “new”), include the following: • New guidance on deduction vs. capitalization of tangible property costs. IRS has issued temporary regs, generally effective in tax years beginning after 2011, on the application of Code Sec. 162(a) and Code Sec. 263(a) to amounts paid to acquire, produce, or improve tangible property. Among other things, these new regs clarify and expand the standards in the current regs; provide certain new bright-line tests for applying these standards; provide guidance under Code Sec. 168 regarding the accounting for, and dispositions of, property subject to that section; and amend the general asset account regs.

• Basis reporting requirements. The complex stock basis and character reporting rules under Code Sec. 6045(g) apply to shares in a regulated investment company (RIC, i.e., a mutual fund), or stock acquired in connection with a dividend reinvestment plan (DRP), if acquired after 2011. (For a three-part article on the basis reporting requirements,  • Estimated taxes for large corporations. For a corporation with assets of at least $1,000,000,000 (determined as of the end of the previous tax year), the amount of any required installment of corporate estimated tax which is otherwise due in July, Aug. or Sept. of 2012 is 100.5% of that amount, and the amount of the next required installment after the installment due in July, Aug. or Sept. of 2012 is appropriately reduced to reflect the amount of the 0.5% increase.

• Use of smartcards or other electronic media to provide qualified transportation fringes. Beginning in 2012, after numerous postponements, the rules under which employers can provide their employees with qualified mass transit fringe benefits through the use of employer-provided credit cards, debit cards, smartcards, or other electronic media officially go into effect (although employers could rely on the guidance before 2012). (Notice 2010-94, 2010-52 IRB 927; • Lump-sum payouts from defined benefit plans. Some defined benefit plans offer participants the option of receiving a lump-sum distribution (e.g., at age 65) instead of an annuity. For plan years beginning after 2007, the Pension Protection Act of 2006 (PPA, P.L. 109-280) amended Code Sec. 417(e)(3) to require defined benefit plans to compute the minimum lump-sum value of an annuity using blended corporate bond rates instead of 30-year Treasury bond rates, which were the benchmark under prior law. Because corporate bond rates generally are higher than long-term Treasury bond rates, the change had the overall effect of reducing lump-sum distributions. Under Code Sec. 417(e)(3), this new rule was phased in over 2008 through 2011 and will be fully in effect for plan years beginning after 2011.

• Hybrid defined benefit plan regs. Regs that set forth the exclusive list of interest crediting rates and combinations of interest crediting rates that satisfy the market rate of return requirement for hybrid plans, apply to plan years that begin on or after Jan. 1, 2012. For plan years that begin before Jan. 1, 2012, statutory hybrid plans could use a rate that is permissible under the final regs, or the 2010 proposed regs.

• “Readily tradable” employer securities. For purposes of meeting Code Sec. 401(a)(35)’s diversification requirements for defined benefit contribution plans, generally effective for plan years beginning on or after Jan. 1, 2012, employer securities that are “readily tradable on an established securities market” and “readily tradable on an established market” mean employer securities that are readily tradable on an established securities market under Reg. § 1.401(a)(35)-1(f)(5).

• Community health needs assessment mandatory. To qualify as tax-exempt, for tax years after Mar. 23, 2012, under Code Sec. 501(r)(3), charitable hospital organizations will need to (i) conduct a community health needs assessment during the tax year or in either of the two tax years immediately preceding the tax year, and (ii) adopt an implementation strategy to meet the community health needs identified therein.

• Work opportunity tax credit (WOTC) not available except for hiring qualified veterans. The WOTC under Code Sec. 51 generally can’t be claimed for an individual who begins work for the employer after Dec. 31, 2011. However, the WOTC continues to be available for employers that hire qualified veterans who began work for the employer before Jan. 1, 2013.

• Disregarded entities included in rules for conduit financing arrangements. Effective for payments made after Dec. 8, 2011, transactions that a disregarded entity enters into are taken into account in determining whether a financing arrangement exists and should be recharacterized under Code Sec. 7701(l) and Reg. § 1.881-3.

• Longer writeoff period for certain property. For specialized realty assets (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) placed in service after 2011, a 39-year (up from 15-year) writeoff period generally applies.)

• Reduced bonus depreciation allowance for qualified property. For qualified property acquired and placed in service after 2011 and before 2013 (after 2012 and before 2014 for aircraft and certain long-production period property), a 50% (down from 100%) bonus first-year depreciation allowance applies under Code Sec. 168(k).

• Reduced expensing. For a tax year beginning in 2012, the Code Sec. 179 expensing election is reduced to $139,000, with a $560,000 investment-based ceiling (down from $500,000/$2 million). For tax years beginning after 2012, it will be further reduced to $25,000 with a $200,000 investment-based ceiling. Additionally for a tax year beginning after 2011, expensing can no longer be claimed for qualified real property

Answer four questions before refinancing a mortgage

Answer four questions before refinancing a mortgage

“Interest rates hit historic lows!” “Refinance Now!” “No-cost refinancing!” These advertisements urge consumers to capitalize on mortgage interest rates that have declined significantly over the past two decades. In December 1991, the average rate on a 30-year mortgage was about 8.25%; now it’s about 4%. That said, mortgage refinancing doesn’t make sense for everyone. Before you rush to your bank or online lender, be sure to answer these four questions.

  • How much will it cost to refinance? In a refinance, you pay off the old mortgage and acquire a new mortgage. Most of the costs associated with the original loan — for appraisals, title insurance, loan origination, credit reports, home inspections, and so on — will be charged for the new mortgage as well. Even if your lender offers a “no-cost” refinance, such costs will probably be rolled into the new loan or factored into the new interest rate. “No cost” isn’t really no cost.
  • How much time is left on your existing mortgage? If you’re nearing the end of your existing mortgage term, refinancing may not make sense. That’s because the bulk of current payment is being used to reduce your principal balance. As a result, lowering your interest rate may not result in savings (after refinancing costs are considered). On the other hand, if you still have many years to pay on an existing mortgage, acquiring a new mortgage with a lower interest rate may indeed save thousands of dollars.
  • How long will you stay in your home? Say you get a lower interest rate that shaves $150 off your monthly payment, but you stay in the home for just one more year. Does it really make sense to pay $4,000 to refinance your existing mortgage? To recover refinancing costs, you would need to enjoy those lower payments for over two years ($4,000/$150 per month = 26 months).
  • Will you cash out your equity? Some homeowners refinance a mortgage to get cash for remodeling kitchens, paying off credit cards, or taking vacations. That’s not always a great idea. Let’s say your home is worth $200,000 and you have a $150,000 mortgage. That means your equity is $50,000. If you cash out $30,000 of that equity and, as a result, your refinanced mortgage increases to $180,000, your payments and long-term costs may escalate as well — even with a lower interest rate.

For help in analyzing the refinancing issue in your situation, contact our office.

Keys to getting a small business loan

Keys to getting a small business loan

Before a start-up company can begin producing revenue, it often needs an infusion of cash that exceeds owner contributions. Even long-established firms sometimes must borrow to purchase inventory, buy real estate, expand operations, meet payroll, or keep the lights on. When business owners turn to banks and other financial institutions for help, some are offered loans; others walk away empty handed.

Why the difference? If you’ve read the financial press in recent years, you know that many banks have been burned. Some with lax underwriting practices extended credit to companies that went bankrupt. Even some strong institutions failed when large loans weren’t repaid. Those that survived may be licking their wounds and rethinking their lending practices. As a result, your bank may be reticent to extend credit to a company that lacks a proven track record or that’s otherwise perceived as a bad risk.

But even if your bank is willing to extend credit, don’t sabotage your efforts by failing to prepare adequately. Increase your chances of getting a business loan by following these suggestions:

  • Show that you have a detailed business plan. Putting your ideas, projections, and assumptions on paper can uncover gaps in your logic and flaws in your research. Your business plan should lay out market research, financial projections, start-up costs (if applicable), and assumptions. Show how you’re going to spend every dollar of the loan proceeds to generate revenue. Consider the plan from the other side of the table. Would you lend money to a company that lacks a credible strategy?
  • Show that you’re capable. Lenders must have confidence in you. Convince them. Show that the combination of your management team’s education, skills, and work ethic will lead to success. To demonstrate your ability to repay the loan, you may be asked to share your credit report and tax returns. If you’ve struggled to meet prior obligations, be ready with explanations, including evidence of extenuating circumstances.
  • Show that you’re invested. Lenders often look kindly on business partners who have pumped a substantial amount of their own savings into a company. Before applying for a business loan, plan to document that at least 25% of the firm’s equity has come from the personal assets of its owners and investors. From a lender’s perspective, such an investment demonstrates a commitment to see the company through hard times — and to pay back the loan.

Payroll update for 2012

Payroll update for 2012

Out with the old and in with the new. The expression applies not only to the upcoming new year, but also to the new year’s payroll tax reporting and compliance.

Here are two changes.

  • Health care costs. You’re not required to include the amount of insurance coverage you provided to your employees in 2011 on Forms W-2. When you have less than 250 employees, you’re exempt from reporting health insurance costs in 2012 as well. If you’re already tracking the costs, you can choose to report the information in both years, no matter how many employees you have.
    Note: The reported benefits are not taxable to your employees.
  • Wages subject to social security. Social security tax (FICA) applies to gross wages you pay your employees, up to a “wage base,” or limit, that’s typically adjusted each year. The wage base for 2012 is $110,100, up from $106,800 in 2011.
    Reminder: There’s no wage base for the Medicare portion of the payroll tax you withhold from employees. All compensation is taxed at the current rate of 1.45%.

Give us a call for information on state payroll tax changes, as well as proposed federal legislation. It’s our job to help you keep up to date